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Exercise6 (2024)

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15 views4 pages

Exercise6 (2024)

Uploaded by

arsikrui
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Exercise 6

Due date: at the beginning of the lecture on May 29


Name ( ) Department ( ) Student ID ( )

Please use this exercise to review Lectures 11, 12.

Please answer each of the following problems.

Optimization with Multiple Variables

1
(1) Let 𝑓(𝑥, 𝑦) = log(𝑥) − 𝑥𝑦 + y 2 where 𝑥, 𝑦 > 0 . Show the solution which maximizes 𝑓(𝑥, 𝑦) by

taking first-order conditions. (You can assume 𝑓 is concave for this problem, which is indeed the

case.)

Answer:

The first-order conditions are:

𝜕
𝜕𝑥
𝑓(𝑥, 𝑦) =

𝑑
𝑑𝑦
𝑓(𝑥, 𝑦) =

By solving them, we obtain (𝑥 ∗ , 𝑦 ∗ ) =

Chain Rule

𝑥
(2) Let 𝑓(𝑥, 𝑦) = y, 𝑔1 (𝑡) = 2𝑡, and 𝑔2 (𝑡) = (𝑡 + 3)2 .
𝑑
Compute 𝑓(𝑔1 (𝑡), 𝑔2 (𝑡)) 𝑎𝑛𝑑 𝑑𝑡
𝑓(𝑔1 (𝑡), 𝑔2 (𝑡)) for t = 1.

Answer:

𝑓(𝑔1 (1), 𝑔2 (1)) =


𝑑
𝑑𝑡
𝑓(𝑔1 (1), 𝑔2 (1))=

Envelope Theorem

Consider the following profit maximization problem with two inputs. Let 𝑥1 > 0 and 𝑥2 > 0 be the

amounts of the first input and second input, respectively. Let 𝑤1 = 1 and 𝑤2 = 1 be the prices of the

1
first input and the second input, respectively. Let 𝑓(𝑥1 , 𝑥2 ) = (𝑥1 𝑥2 )4 be the production function and

1 1
𝑝 = 4 be the price of the output. Let π(x1 , x2 ) = 𝑝𝑓(𝑥1 , 𝑥2 ) − 𝑤1 𝑥1 − 𝑤2 𝑥2 = 4𝑥1 4 𝑥2 4 − 𝑥1 − 𝑥2 .

Assume π is a concave function (which is indeed the case).

For each 𝑥2 > 0, let 𝑥1∗ (𝑥2 ) be the solution to the problem: max 𝜋(𝑥1 , 𝑥2 ).
𝑥1

𝑑
(3) Compute 𝑑𝑥2
π∗ (𝑥2 ) by Envelope theorem.

Answer:

(4) Find 𝑥1∗ (𝑥2 ) by the first order condition, and confirm that Envelope theorem holds.
Answer:

Lagrange Multiplier Method

Let 𝑥1 , 𝑥2 be the amounts of consumptions of goods 1 and 2, respectively.

Let 𝑢(𝑥1 , 𝑥2 ) = { (𝑥1 )𝜌 + (𝑥2 )𝜌 }1/𝜌 be the utility function, where ρ is a real number with ρ < 1 and

ρ ≠ 0.

We derive the solution to the utility maximization problem as follows.

(5) Compute the marginal utility of good 1 and the marginal utility of good 2.

𝜕
Answer: 𝜕𝑥1
𝑢(𝑥1 , 𝑥2 ) =

∂
𝑢(𝑥1 , 𝑥2 ) =
∂𝑥2

𝜕 ∂
(6) Compute MRS12 ( = 𝜕𝑥 𝑢(𝑥1 , 𝑥2 )/ ∂𝑥 𝑢(𝑥1 , 𝑥2 ) ) .
1 2

Answer: MRS12 =

(7) Let 𝑝1 > 0 and 𝑝2 > 0 be the prices of good 1 and good 2 and I > 0 be the income. Consider the
utility maximization problem subject to the budget constraint I = 𝑝1 𝑥1 + 𝑝2 𝑥2 . Find the solution

(𝑥1∗ , 𝑥2∗ ) based on the Lagrangian method (you can assume an interior solution, which is indeed the

case here).

Answer:

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